Investment Matters

The answer is...

...Company A's share price decreased.  And the price of Company B rose.

Company A is QBE.  Company B is Primary Health Care.

It is interesting to reflect on this.  We think it shows a number of things.

Although Primary's result was down compared to FY-16, it met, if not slightly beat, expectations.  Additionally, there were clear signs that the turnaround in the largest division, Medical Centres, is underway - for instance in relation to GP recruitment and retention.  Therefore investors and analysts were a bit more positive about the future.  As such, the share price increased 2.8% (on a day when the market fell 0.5%).  The market's reaction to Primary's result wasn't surprising.  Albeit it was a poor looking result.

QBE's share price fall was, from our perspective, perverse.

The fall wasn't about not meeting expectations.  Key financial metrics for H1 FY-17 (for QBE FY = CY), from which profit is derived, were in line with guidance (the company downgraded guidance in late Jun-17, to the then disappointment of the market.  The released results were overall towards the top of this guidance range.)   It was something else altogether, and it was clearly present during the results conference call to analysts and investors.  There was a highly emotional tone to the questions, and a clear lack of ability by the analysts to look critically at the result, particularly in light of industry conditions globally (the relevant benchmark for QBE).

What this shows is that in the short term emotion drives share prices. 

Whilst QBE delivered what it said it would (and it is globally leading in its profitability, in tough conditions) analysts were angry.  Profit was up +30% and the turnaround in performance promised over the past few years is clearly being delivered.  However, it doesn’t matter.  Analysts (and I should note some of the financial media) have decided that there is something about QBE they just don’t like, and hostilities abound!  Whereas in the Primary case, where arguably the same history is present (long standing CEO leaves a mess for the next generation to pick and clean up, in difficult trading conditions), the market is happy to give the benefit of the doubt.

In the long term analysts feelings and investor emotions won't matter, and this dislocation is often what creates opportunities for sensible long term investors.